Principal Private Residence Relief (PRR) for an adjoining property

The property in question

James* engaged our Tax Investigations & Dispute Resolution team in relation to the disposal of a property purchased to house his ailing father-in-law. Rather than allow his father-in-law to be placed in a care home, potentially at the taxpayer’s expense, James purchased the property next door and undertook substantial work to join the two houses, almost entirely removing one of the dividing walls and creating one large garden. James, his wife, and his father-in-law then proceeded to live together, with James paying all of the bills for the next seven years.

When James’s father-in-law sadly passed away, he returned the properties to their previous state, retained their original home, and sold the adjoining property. James did not declare the disposal, believing he would benefit from PRR, and the gain would be exempt.

HMRC disagreed with the tax treatment and refused to apply the relief.

The law 

Those familiar with the requirements of PPRR will know that ‘relief is available where a gain is realised on the disposal of a dwelling house, or part of a dwelling house, which is, or has been at any time in his period of ownership his only or main residence’ – s.222 TCG 1992. 

’Dwelling’ has not been defined in legislation and as such, we turned to case law and HMRC’s manuals to demonstrate the relief extended to James’s circumstances.

Our argument

While there have been cases relating to the availability of PRR on the sale of outbuildings, there was no precedent relating expressly to the purchase of another property which was previously distinct from the property originally lived in i.e. another dwelling. 

Lewis v Rook is considered to be the leading case for PRR, and although it also concerned an outbuilding, it did provide some assistance. The judge confirmed “what one is looking for is an entity which can be sensibly described as being a dwelling house, though split into different buildings performing different functions.”

Clearly the properties owned by James were performing the same function, and, joined as they were, they could also sensibly be described as a dwelling house. Furthermore, from a simple consideration of the intention behind the law, namely that tax should not be paid on the disposal of a family home, it is clear a dwelling is simply a building, or a number of buildings, occupied by the same family. 

This is also apparent from HMRC’s own manual, CG64305, which allows for occasions in which two or more flats can be considered to be one dwelling for the purpose of PRR. This is provided they are occupied by the same family, within the same block and are contiguous. Following this same reasoning, two joined houses occupied by three adults, living together as a family unit must also be considered a dwelling.

Case closed

HMRC did raise some objections with regards to separate council tax and utilities, but in the face of our arguments and its own manual, it was ultimately forced to concede, resulting in a considerable tax saving for James.

Given the pressure currently being placed on the care system, buying adjoining properties to provide room to house elderly relatives could become more common. HMRC may issue a manual covering this point in due course, but for the moment tax advisers would be wise to keep CG64305 to hand.

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*Clients' name changed to protect their confidentiality